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Copyright: Toni Straka, 2005-2011 This blog is for information and entertainment purposes only. Under no circumstances does this information represent a recommendation to buy or sell securities or any other type of investment instruments.

Wednesday, June 23, 2010

---by Sean Rakhimov---

Some of you may have seen the news regarding the launch of a new (and at the moment the only) silver miners fund from Global X Funds, managed by a New York based company that issues a number of ETFs, including one for copper miners. The copper and silver miner funds started trading on April 20, 2010. SIL has a 0.65% expense ratio and is based on an index from a German based outfit at Structured-Solutions.eu. We think the fund (and its underlying index) provides a reasonable representation of the global silver miners sector. The fund's holdings can be viewed here.

The Global X Silver Miners fund came out of the gate with a whopping $1.5 Million in assets under management. In less than two months it has been in existence the fund has grown to $54.6 Million in assets under management. As a comparison, the Global X Copper Miners Fund (NYSE Arca: COPX) in the same period has grown from $1.5 to $1.77 Million (Assets under management numbers are as of June 15, 2010). Is there a message there? We believe the message is:

a) There is an appetite for silver (read as precious metal) stocks in the marketplace;

b) The overall inflation is not being "priced in" base metal stocks on this stretch.

If our thinking is correct, there is a separation in the minds of investors of silver (and gold) stocks from other resource stocks. There may be other reasons for this great disparity in market sentiment towards these two funds or, to be precise, the asset classes they respectively represent. This is extremely important and should serve as confirmation that the long anticipated currency crisis is here. Indeed, there is plenty of coverage in the financial media of currency gyrations in various parts of the world, however, this subtle sign reveals where the money is flowing. Speaking of money flow, several months ago we published an article discussing potential avenues where money could be directed in the near future and the 3600% growth in assets under management of the silver miners fund in just five weeks confirms that we saw this coming.

Getting back to SIL, it is an open ended fund where new shares are created in 50,000 share increments. That means the fund will grow as new money comes in (also discussed in the above mentioned article) as well as the appreciation of fund's holdings. We're not giving much ink to individual stocks in the fund here as they are often and amply dissected elsewhere on these pages. However, we have to point out that Industrias Penoles probably does not belong in this fund as its primary silver assets are already represented in Fresnillo which was spun out of Penoles a couple of years ago. We would like to see Penoles removed from this fund and its allocation distributed among the junior producers.

Overall, we think Global X Silver Miners fund is a timely addition to the sector and will be popular with investors large and small. As it grows in size we would expect it to get increasingly popular with institutions that have no knowledge of the mining sector. This is a very welcome development for the silver sector and particularly silver companies. When the silver bullion ETF (SLV) was first launched it had around 30 million ounces of silver in holdings. It has since added another 100 million oz to its holdings. This was because it provided a convenient investment vehicle available for numerous investor groups which had previously shied away from the sector due to its specifics. They needed an instrument that was easy to trade without needing to know much about it. We think silver equity funds starting with SIL can have a similar impact on silver mining stocks, where investors who don't know or don't want to know much about individual silver companies will buy the fund. Among other factors are diversification throughout the sector, liquidity and access. Some of the individual stocks may be difficult to get in and out of. The majority of mining companies are not US based, though some have a US listing. A mining fund should have access to all public markets and companies worldwide. Now that the first silver miners fund validated the demand we would expect new ones to come to market from different competing groups (much like the bullion ETFs).

This Gold Thing Is Getting Too Expensive

Gold has been the star performer compared to silver in last couple of years. Or so you would think based on the headlines and the amount of attention either gets. That is because gold is the big dog in the race - it is a bigger receptacle and logical place to go for the "big" money. However, the main reason we zeroed in on silver back around year 2000 was our conclusion that in the coming hard assets bull market silver would outperform gold comparative terms 3-to-1. The other metric we have cited in the same context is that gold-to-silver ratio would get below 20:1 before the end of this bull market and possibly below 10:1. For reference, as of this writing the ratio is around 70:1. This will be made possible by, among other things, the fact that at some point the majority of (small) investors will be priced out of the gold market. Pardon the lengthy prelude, but it appears we're witnessing the early signs of that. On June 11, 2010 the iShares COMEX Gold Trust bullion ETF (NYSEArca: IAU) announced a 10-for-1 share split. That brought its share price from $1000+ area to $100+ which they obviously thought would make it more affordable for would-be-buyers and broaden the reach of the ETF to wider audience. We view this as the first of many to come and a confirmation of gold price becoming "too expensive" for many investors. Enter silver.

The Fear Factor

As is well known in the investment arena gold and silver are the only assets whose markets are driven by fear as opposed to greed which rules all other assets classes. The fact that SIL is embraced by the market to the extent it has been to date proves that there is plenty of "fearful" money out there. We think such truly explosive growth (in percentage terms) in assets under management is an important clue. To that end, the latest breakout in both gold and silver to the upside should leave no doubt in your mind that the "fear trade is in". If there were a bell to ring on this occasion – this is it, consider yourselves warned. Of course, no one rings the bell at market turning points, so we hereby are doing the next best thing. Time will tell if this was a good call.

On occasion seasoned investors talk about a 50% correction known to temporarily break up the party in a commodity bull cycle. For example, in the last gold bull market it happened when gold went from $200 down to $100 only to zoom to $850 afterwards. (We're not going to use silver in this context because Ag can correct 50% on a whim and does so fairly regularly.) We suspect that such a correction may be in the cards at some point during this cycle as well. In the current environment ripe with all manner of moving parts, vulnerable to recurring liquidity crunch(es), credit crises and ominous looking geopolitical developments virtually impossible to keep straight in one's mind, let alone analyze their combined and cumulative impact and/or consequences on the price of anything in the short term we would suggest that you keep a look out for one of these 50% corrections. So don't fear the "fear trade" as it were, it should be making you rich-er as we speak. But don't get complacent either. Anything can happen at any time these days.

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EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

FROM THE US TREASURY WEBSITE: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy."

A LESSON FROM HISTORY BOOKS: The past 300 years have proven that ALL fiat money experiments ended in complete devaluation. From Rome to Britain: every empire vanished into oblivion soon after it went off the gold standard. It is time to recognize the obvious: Unbacked money has never worked.

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About Me

I am an INDEPENDENT Certified Financial Analyst who worked as a financial journalist for 15+ years and now evaluate global market trends. Analyzing financial and political news permanently I want to share my insight with those who understand that we are in an era of global redistribution of wealth. The US-European centric approach does not work anymore. 6 billion people in the developing countries now demand their fair share of the world's resources.
Having worked many years for a leading newswire I have learned to understand the fatal concept of ever expanding credit by heart. If you want to learn about the future of the economy, study history.